No, Mitt Romney Does Not Believe in This "Arithmetic". Why Do You Ask? Kevin Hassett-and-Scraping-the-Bottom-of-the-Barrel Edition

One of my phone calls yesterday--one that I did not answer at the time--was asking me what I thought of the quote below from the not-so-famous Kevin Hassett, made on a Romney campaign conference call yesterday.

A little background first: Samuel Brown, William Gale, and Adam Looney crunched the numbers on what we know of Romney's tax plan: in the long run, after we have recovered from our current slump, average tax cuts of $175,000/year for taxpayers reporting over $1,000,000 in income; average tax cuts of $1,800/year for taxpayers reporting incomes of around $100,000/year; average tax increases of $130/year for taxpayers making less than $30,000/year; in the long run a total of $360 billion/year of revenue losses, of which $250 billion/year flow to those reporting incomes of more than $200,000/year, $80 billion/year flow to those reporting incomes of between $100,000/year - $200,000/year, and $30 billion/year flow to those reporting incomes of less than $100,000/year.

Romney says he wants to make up the $360 billion/year of reduced revenue by closing "loopholes"--but he has not said which "loopholes": he has only said that the mortgage interest deduction, the savings-program 401(k) deduction, and like provisions are not "loopholes".

By Brown et al.'s count--which looks right to me--Romney has left only $550 billion/year of "loopholes" on the table: . Of those, some $165 billion/year flow to those reporting incomes of more than $200,000/year. That means that even if--even if: it ain't going to happen because he ain't going to push Congress to do it--Romney eliminates all of his on-the-table "loopholes" as they apply to America's upper class, he will have in the long run redistributed some $85 billion/year to America's upper class--and raised taxes in the long run by $85 billion/year on the middle and working classes if he is going to keep the long-run budget deficit from growing.

And this is the point at which the Romney campaign trots out Kevin "Dow 36000" Hassett to serve as an expert validator to say that, no, Romney's tax reform plan doesn't raise taxes on the middle and working classes because the revenues lost by giving bigger tax cuts to the upper class will be made up by faster economic growth.

Here's Hassett:

The bottom line is that Governor Romney has a tax plan that would reduce individual marginal income tax rates across the board by 20% while keeping a low tax rate on dividends and capital gains while reducing the corporate income tax rate to 25% and he’s going to do this on a broad-based, revenue neutral platform. This type of reform is something that economists have studied very often in the past and there’s a big literature that suggests that something like this, in some way, is modeled after the 1986 Tax Act, you can get a significant amount of economic growth. There’s a paper in 1998 even by Alan Krueger and Jim Poterba that sketched out a plan somewhere to this and asked 69 public finance economists what they thought the growth effects of this would be and they found that a reform plan like that or very similar to ours would review the--would increase economic growth by about a percentage point here over a longer period. There have been other models that try to factor this into you know really fancy dynamic general equilibrium modeling that find that you can get economic growth between half a percent and a percent and higher over a decade and [inaudible] University of Berkeley and I just wrote a book well about 5 years ago where we reviewed that whole literature and found effects of that scale. Now, if you assume that you get effects of that scale then the Romney plan looks really, really good in the long run…

1% extra of GDP--if you could get it--taxed at an average rate of 20% is an extra $32 billion/year of tax revenue. $32 billion/year < $85 billion/year. $32 billion/year is less than 2/5 of $85 billion/year.

This is an arithmetic fail.

And, of course, if you bust open the long-run deficit further--which Romney does, not just through this tax-cut-for-the-upper-class plan but through the repeal of the efficiency-promoting portions of the Affordable Care Act--you don't boost but slow long-run growth. You increase uncertainty about the future: somebody is ultimately going to pay taxes to pay for government spending, we just don't know who. And in the long-run in which we get out of the slump government borrowing does crowd out private investment and slow growth.

In all likelihood we don't get a growth boost from this plan, we get a growth slowdown. And so the gap that must be closed is not $85 billion/year, but rather more.

And there are the other things wrong with Hassett's statement: Romney's tax plan does not have a bottom line--there is no real Romney tax plan. Romney's tax plan is not modeled after the Bradley-Baker 1986 tax reform. Alan Krueger and Jim Poterba would, I think, not agree that this is a reform plan like that they studied in 1998.

But you already know that any time Hassett comes to dinner, count the spoons.

Dow 36,000 is a provocative and well-written treatise that cannot be dismissed as easily as many of its critics have suggested. But what is at stake here is much more important than a debate among economists. This is a book with the goal of giving investment advice. For this reason I believe Dow 36,000 is a dangerous book that may lead some investors who can ill afford the significant risks of equity investments to throw caution to the wind.

One of the maxims of investing is that if something sounds too good to be true, it probably is too good to be true. Which brings us to one of the hottest business books around, Dow 36,000 by James Glassman and Kevin Hassett…. Glassman and Hassett have a head-turning thesis: that over the long term, U.S. stocks are no riskier than your grandmother's boring Treasury bonds and that the Dow, far from being overvalued, should be around 36,000. So you see why the book is buzzworthy. It's also schizophrenic. It has wonderfully clear explanations of financial theory, excellent advice on general investing approaches. But it's also got seriously flawed parts, where the authors assert claims with mathematical precision but actually play fast and loose with numbers. My problem with Dow 36,000… is that even if you accept the thesis that U.S. stocks are no riskier over the long term than Treasury bonds--which I don't--you have to torture the numbers to justify 36,000 as a reasonable price for the Dow today.

Hassett turns this into:

Alan Sloan: One of the hottest business books around.... It has wonderfully clear explanations of financial theory [and] excellent advice on general investing approaches.

That the Romney campaign is trotting out Hassett as a validator tells you all you need to know about how empty is the barrel that they are scraping in search of validators.

Comments

No, Mitt Romney Does Not Believe in This "Arithmetic". Why Do You Ask? Kevin Hassett-and-Scraping-the-Bottom-of-the-Barrel Edition

One of my phone calls yesterday--one that I did not answer at the time--was asking me what I thought of the quote below from the not-so-famous Kevin Hassett, made on a Romney campaign conference call yesterday.

A little background first: Samuel Brown, William Gale, and Adam Looney crunched the numbers on what we know of Romney's tax plan: in the long run, after we have recovered from our current slump, average tax cuts of $175,000/year for taxpayers reporting over $1,000,000 in income; average tax cuts of $1,800/year for taxpayers reporting incomes of around $100,000/year; average tax increases of $130/year for taxpayers making less than $30,000/year; in the long run a total of $360 billion/year of revenue losses, of which $250 billion/year flow to those reporting incomes of more than $200,000/year, $80 billion/year flow to those reporting incomes of between $100,000/year - $200,000/year, and $30 billion/year flow to those reporting incomes of less than $100,000/year.

Romney says he wants to make up the $360 billion/year of reduced revenue by closing "loopholes"--but he has not said which "loopholes": he has only said that the mortgage interest deduction, the savings-program 401(k) deduction, and like provisions are not "loopholes".

By Brown et al.'s count--which looks right to me--Romney has left only $550 billion/year of "loopholes" on the table: . Of those, some $165 billion/year flow to those reporting incomes of more than $200,000/year. That means that even if--even if: it ain't going to happen because he ain't going to push Congress to do it--Romney eliminates all of his on-the-table "loopholes" as they apply to America's upper class, he will have in the long run redistributed some $85 billion/year to America's upper class--and raised taxes in the long run by $85 billion/year on the middle and working classes if he is going to keep the long-run budget deficit from growing.

And this is the point at which the Romney campaign trots out Kevin "Dow 36000" Hassett to serve as an expert validator to say that, no, Romney's tax reform plan doesn't raise taxes on the middle and working classes because the revenues lost by giving bigger tax cuts to the upper class will be made up by faster economic growth.

Here's Hassett:

The bottom line is that Governor Romney has a tax plan that would reduce individual marginal income tax rates across the board by 20% while keeping a low tax rate on dividends and capital gains while reducing the corporate income tax rate to 25% and he’s going to do this on a broad-based, revenue neutral platform. This type of reform is something that economists have studied very often in the past and there’s a big literature that suggests that something like this, in some way, is modeled after the 1986 Tax Act, you can get a significant amount of economic growth. There’s a paper in 1998 even by Alan Krueger and Jim Poterba that sketched out a plan somewhere to this and asked 69 public finance economists what they thought the growth effects of this would be and they found that a reform plan like that or very similar to ours would review the--would increase economic growth by about a percentage point here over a longer period. There have been other models that try to factor this into you know really fancy dynamic general equilibrium modeling that find that you can get economic growth between half a percent and a percent and higher over a decade and [inaudible] University of Berkeley and I just wrote a book well about 5 years ago where we reviewed that whole literature and found effects of that scale. Now, if you assume that you get effects of that scale then the Romney plan looks really, really good in the long run…

1% extra of GDP--if you could get it--taxed at an average rate of 20% is an extra $32 billion/year of tax revenue. $32 billion/year < $85 billion/year. $32 billion/year is less than 2/5 of $85 billion/year.

This is an arithmetic fail.

And, of course, if you bust open the long-run deficit further--which Romney does, not just through this tax-cut-for-the-upper-class plan but through the repeal of the efficiency-promoting portions of the Affordable Care Act--you don't boost but slow long-run growth. You increase uncertainty about the future: somebody is ultimately going to pay taxes to pay for government spending, we just don't know who. And in the long-run in which we get out of the slump government borrowing does crowd out private investment and slow growth.

In all likelihood we don't get a growth boost from this plan, we get a growth slowdown. And so the gap that must be closed is not $85 billion/year, but rather more.

And there are the other things wrong with Hassett's statement: Romney's tax plan does not have a bottom line--there is no real Romney tax plan. Romney's tax plan is not modeled after the Bradley-Baker 1986 tax reform. Alan Krueger and Jim Poterba would, I think, not agree that this is a reform plan like that they studied in 1998.

But you already know that any time Hassett comes to dinner, count the spoons.

Dow 36,000 is a provocative and well-written treatise that cannot be dismissed as easily as many of its critics have suggested. But what is at stake here is much more important than a debate among economists. This is a book with the goal of giving investment advice. For this reason I believe Dow 36,000 is a dangerous book that may lead some investors who can ill afford the significant risks of equity investments to throw caution to the wind.

One of the maxims of investing is that if something sounds too good to be true, it probably is too good to be true. Which brings us to one of the hottest business books around, Dow 36,000 by James Glassman and Kevin Hassett…. Glassman and Hassett have a head-turning thesis: that over the long term, U.S. stocks are no riskier than your grandmother's boring Treasury bonds and that the Dow, far from being overvalued, should be around 36,000. So you see why the book is buzzworthy. It's also schizophrenic. It has wonderfully clear explanations of financial theory, excellent advice on general investing approaches. But it's also got seriously flawed parts, where the authors assert claims with mathematical precision but actually play fast and loose with numbers. My problem with Dow 36,000… is that even if you accept the thesis that U.S. stocks are no riskier over the long term than Treasury bonds--which I don't--you have to torture the numbers to justify 36,000 as a reasonable price for the Dow today.

Hassett turns this into:

Alan Sloan: One of the hottest business books around.... It has wonderfully clear explanations of financial theory [and] excellent advice on general investing approaches.

That the Romney campaign is trotting out Hassett as a validator tells you all you need to know about how empty is the barrel that they are scraping in search of validators.

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